Political connection as a double-edged sword: the case of tax aggressiveness practice during the COVID-19 pandemic

Abstract

Purpose – This research aims to examine the association between political connection and tax aggressiveness during the COVID-19 pandemic and the role of business ethics in the association between political connection and tax aggressiveness. Design/methodology/approach – This study employs a multiple regression method for 147 manufacturing firms listed on the Indonesia Stock Exchange during the pandemic era. Findings – Political connection has no association with tax aggressiveness. However, political connection has a negative (positive) association with tax aggressiveness in more (less) ethical firms. The results are robust after controlling for year-fixed effects, endogeneity issues and other tax aggressiveness measurements. Originality/value – Political connection is often cited as the driver of unethical business, including tax aggressiveness. However, this paper claims and finds that political connection is a double-edged sword. Ethical firms use political connection to reduce their tax aggressiveness, and vice versa. Previous research has paid little attention to this topic. This paper also uses COVID-19 as a natural experiment to highlight the importance of corporate social responsibility activities as business ethics.

Keywords

• Political connection
• Tax aggressiveness
• CSR activities
• COVID-19